Staying the course can beat market swing worries

The market's recent decline may have you worried. After hitting a recent high in May, the S&P 500, an index of large U.S. company stocks, has dropped nearly 6 percent, excluding dividends.

Should you be worried? Many young investors, reared in the volatility of the last decade, may think so. But while market swings can be hard to stomach day to day, they are a natural part of investing, say financial planners. They won't always get in the way of long-term goals.

Looking at past corrections. For proof, go to 2007. From October of that year to March 2009, the S&P 500 declined 57 percent, one of the worst sell-offs in history. Investment portfolios took a beating as trillions of dollars in stock value disappeared.

And yet, the losses did not last forever. An annual study of defined contribution plans by Vanguard found that the median balance for accounts that existed at the end of 2007 climbed 67 percent by the end of 2012, or five years later. Ongoing contributions by plan participants were a big reason.

But stocks' recovery has also helped. From the market bottom in 2009 through the end of 2012, the S&P 500 gained 111 percent, excluding dividends.

Market swings are the norm. Not every sell-off will be as severe as the 2007-2009 downturn. In fact, corrections are a normal part of the stock market, says Stuart Ritter, a senior financial planner at T. Rowe Price.

"These market movements are very typical," he said. "The reasons the market goes up and down change, but the movements don't. The stock market does not go straight up and never has."

Last year, for example, the S&P 500 lost nearly 8 percent from September to mid-October. Looking at 2012 in total, however, stock prices finished up 13 percent.

Staying the course for long-term goals. The problem occurs when the market falls at the same time you need your money. If you have to tap into savings shortly after a significant market loss, the impact on your balance and your ability to reach a financial goal can be devastating.

But someone in his 20s or 30s normally won't need to access retirement dollars for a decade or more. There is time to recover.

"Don't be so distracted by short-term performance that you abandon your strategy," Ritter said. "Because then all you're doing is locking in whatever short-term loss you've experienced."

After the 2007-2009 bear market, it took investors only a few years to get ahead again. And most did. According to the Vanguard study, nearly 90 percent of people who were already saving through a defined contribution plan at the end of 2007 saw their account balance go up by the end of 2012.

And as the study and financial advisers point out, while market returns are important, making regular contributions to your savings is just as crucial.

"Resist putting yourself in a position where you need the money before it's had time to gather long-term growth," said Bonnie Sewell, a financial planner in Leesburg, Va., "because investing returns can rarely overcome a lack of savings."

Of course, growth is not assured in the stock market. There is no guarantee that, even with rigorous saving, you will get ahead by the time you're ready to retire. But historically, having at least some stake in stocks — in good and bad markets — has been better than nothing.

As Ritter notes, a portfolio with 80 percent in U.S. stocks and 20 percent in intermediate-term U.S. bonds has had a positive return every 10-year period since 1926. So, no matter what year you start, whether it's 1926, 1964 or 1999, for example, the balance in a portfolio of 80 percent stocks and 20 percent bonds went up over the next 10 years.

"Not some (10-year periods). Not most," Ritter said. "Every single one of them."